Market Overview
The US Treasury yield curve inverting at the key 3 month/10 year spread is a concern for risk appetite. Whilst the distortions of unwinding its massive balance sheet (around $4.5trillion at its peak) means that there needs to be a degree of scepticism over the implications of curve inversion, it is still coming at a time during which fears over a global cyclical slowdown are taking hold. It was interesting to see the US dollar performing well yesterday even as housing data and consumer confidence both missed expectations. The dollar is still seen as a safe haven option. Against a slowing Eurozone this is a drag on EUR/USD, however, a rebound against the yen may not last the course. Major central banks around the world seem to be falling over each other in a drive to turn dovish again. The Reserve Bank of New Zealand monetary policy decision to keep rates flat at a low of +1.75% was fully expected (no change +1.75% exp, +1.75% last). However what did surprise the market was a shift in emphasis which has opened the way towards a possible rate cut. Citing increasing downside risks to its outlook, the next move is more likely to be a rate cut. The New Zealand dollar, which has been a standout performer during these past few weeks, has been hit hard overnight and is around 1.5% lower. This could now put the Kiwi on a path of correction across the majors as outperformance unwinds on new expectation of a cut. The Brexit circus rolls on today and MPS will vote on a series of “indicative votes” (non-binding on the government). Options for MPs include a second referendum (do we really want to do this?), a customs union with the EU (softer Brexit), to revoke Article 50 entirely (no Brexit), amongst others. Mrs May’s much-maligned deal could be voted on for a third time later this week.
Wall Street closed solidly higher last night with the S&P 500 +0.7% at 2818, with US futures +0.2% higher. In Asia, markets have been mixed with the Nikkei -0.2% and the Shanghai Composite +0.9%. In Europe the outlook is slightly positive again after yesterday’s rebound, with FTSE futures and DAX futures around +0.3% higher. In forex, there is a mild risk negative/dollar positive vibe. The big underperformer is the Kiwi, whilst sterling is also slipping back again along with mild euro losses. The dollar is performing well along with the safe haven yen. In commodities, there is tick or two lower on gold and silver, whilst oil is also mixed.
Once more focus in the economic calendar turns to US data, with the Q4 2018 US current account deficit announced at 1230GMT which is expected to deteriorate further to -$130bn (-$125bn in Q3 2018). The US trade balance for January is also at 1230GMT and is expected to improve slightly to -$57.0bn although this is still hugely large after December’s -$59.8bn which was the widest trade deficit for ten years. US EIA oil inventories are at 1430GMT which are expected to show crude stocks again in drawdown of -3.3m barrels (last week -9.6bn) whilst distillates are expected to drawdown by -0.8m barrels (last week -4.1m barrels) and gasoline drawdown by -3.0m barrels (-4.6m last week).
Chart of the Day – GBP/AUD
The Aussie has had a bit of a jump in recent sessions, however hitting resistance across major pairs some profits seem to now be setting in to restrict its advance. With sterling expected to feel the benefit of a move towards a softer Brexit in the coming days, this sets up GBP/AUD as a correction to be bought into within the uptrend channel. There has been a pivot at 1.8400 which has been a basis of support in the past month and once more the price gravitating towards here has attracted buyers. There is a positive configuration on a medium term basis with the four month uptrend channel and medium term momentum indicators suggesting corrections are still a chance to buy. The RSI unwinding towards 45 has been an opportunity, whilst the Stochastics are already turning higher in positive configuration. A move towards 1.8400 that finds a basis of support should be seen as an opportunity in the coming days. A breakout above the two week downtrend (today at 1.8650) and the reaction high at 1.8685 would be a signal for the bulls regaining control of the medium term trend channel again for a test of the 1.8860 high. A close below 1.8400 would be disappointing now and below 1.8335 breaches the channel and rising 55 day ma support.
EUR/USD
The euro bulls have been dealt a blow as an encouraging basis of support building between $1.1270/$1.1300 has been broken. A third strongly negative candlestick in the past four sessions has now turned momentum decisively corrective once more and the lows at $1.1215 and $1.1175 are now back into view. The MACD lines crossing lower below neutral is a big concern now, whilst the Stochastics continue to deteriorate towards bearish configuration. The hourly chart reflects this negative configuration now, with a resistance forming under $1.1320, whilst hourly RSI fails under 60 and hourly MACD fails under neutral. Intraday rallies are now a chance to sell. It would take a recovery above $1.1340 to really improve the outlook now.
As political uncertainty over Brexit has taken hold, traders seem to be sitting on the sidelines for now. This may change tonight with the volatility surrounding the non-binding votes on how to push Brexit forward. In the meantime, the market is hovering and trading around the $1.3200 mark. Two very small bodied candlesticks with equal shadows either side reflect the uncertainty. The momentum indicators are increasingly benign with RSI and Stochastics all but neutral. The two week downtrend is being tested, and there still seems to be a sense of using intraday weakness as a chance to buy. Despite this there is a cap of resistance around $1.3250/$1.3260 and under the old $1.3300 ceiling area. Initial support is $1.3150 and then $1.3080/$1.3100. The hourly chart gives us little more as we await the next Brexit related catalyst. We may only need to wait until tonight.
A decent sized recovery candle on Dollar/Yen has pulled the market higher to leave support at 109.70. It will be interesting to see if the bulls can now build on this rebound as the near term signals are hinting at a potential recovery. Is this just a kneejerk higher on Stochastics that will peter out? The reaction around 110.75/111.00 resistance band will be key. This was a previous band of support which is now overhead supply. It was tested initially yesterday and remains intact. With the 21 day moving average rolling over around 111.15 today (an old basis of support which could now add to overhead resistance) there is more the bulls need to do. The RSI needs to move decisively above 50 (ideally above 60) to break a sequence of slippage too. The hourly chart reflects the improvement and pivot support is growing at 110.25. This is an important phase for the pair.
Gold
With risk appetite improving yesterday, gold found a degree of corrective pressure, but how the market responds to the $1310 long term pivot will now be key as it is now supportive. The recent breakout is also now supported by a two and a half week uptrend. This confluence of support means that yesterday’s negative candlestick increases the importance of today’s session. With regards to higher reaction lows, the support comes in at $1298 but with momentum indicators more positively configured now, the corrections will be considered to be a chance to buy again. If the bulls can continue to protect the long term pivot band $1300/$1310 then the outlook will continue to improve. The bulls need to build on the early pick up from yesterday’s ow of $1312 to move back above initial resistance at $1318.60. Resistance is then sitting at $1324 from Monday’s high. The hourly chart shows corrections in this phase over the past couple of weeks have continually found buyers to support and already momentum is set up to suggest the buyers are ready again.
WTI Oil
The bulls continue to defend the positive outlook on oil where corrections back towards breakout support continue to be seen as a chance to buy. The medium term pivot at $58.00 marks the top of a support band $57.50/$58.00 but the bulls have returned once more to push higher. Closing above the 50% Fibonacci retracement at $59.60 is a positive sign that the bulls are ready again, whilst the RSI has ticked higher from 60 and Stochastics are ready to hold strong configuration above 80. A move above initial resistance at $60.40 opens the next resistance at $63.60 and the 61.8% Fibonacci retracement at $63.70.
Even though the Dow rallied yesterday to seemingly improve the near term prospects, there is still a degree of uncertainty over the move. The formation of a doji candle suggests the support forming is tentative and lacking conviction. Despite this, the Dow has now left a low around 25,370 which is above the March low at 25,210 with the momentum of the near term moves threatening to turn higher again. The bulls will have yesterday’s high of 25,795 in their sights now as the hourly chart still has an air of a corrective feel to it. If there can be a break above 25,795 then this would improve momentum and see the hourly RSI above 60 and MACD lines above neutral. Initial support to gauge is 25,545. This could be turning into an upswing within an increasingly ranging phase of medium term trading.
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